The Federal Open Market Committee voted 10-2 to maintain rates, delaying further adjustments to borrowing costs despite stronger-than-expected inflation
In its last meeting before the all-important US midterms, the FOMC of the Federal Reserve held interest rates steady, keeping its benchmark borrowing rate in the 3.75%-4.00% range as inflation remained elevated and policymakers awaited fresh economic data.
The FOMC (Federal Open Market Committee) voted 10-2 to maintain rates, delaying further adjustments to borrowing costs despite stronger-than-expected inflation and concerns that price pressures are spreading across the economy.
The decision came with an improved assessment of economic growth.
While the central bank, led by Kevin Warsh, said the US economy was expanding at a “strong pace,” it further expressed confidence that inflation could return to the FOMC’s 2% target without undermining growth or increasing unemployment.
Speaking after the conclusion of the Fed’s two-day policy meeting, Warsh said he expected Thursday’s third-quarter GDP report to show strong investment and consumer spending, alongside faster growth than in the first half of the year.
However, he argued that the economy was not overheating and that demand-driven inflation did not necessarily require additional monetary tightening.
“The economy is pointing in the right direction. Is the economy overheating? Is the economy running too strong? That isn’t the judgment of most of my colleagues,” Warsh said.
Warsh reiterated his view that productivity improvements, including developments predating the artificial intelligence (AI) boom, could allow the world’s largest economy to grow faster without generating proportionately higher inflation.
In my opinion, the goal is not to disrupt the economy or cause job losses. I don’t think we have to do that,” he said.
The Fed chairman argued that existing interest rates were already affecting financial conditions, with tighter credit potentially slowing business investment.
He also pointed to recent stock market declines as a possible source of disinflation if weaker asset prices curb spending among wealthier households.
US Treasury Secretary Scott Bessent said on Thursday that the administration continued to have confidence in Warsh’s ability to balance the Fed’s inflation objective with economic growth.
However, the latest FOMC statement indicated that policymakers would continue assessing incoming economic data before determining their next move.
“Between now and the next policy meeting in December, the accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee’s 2% goal,” the committee said, adding that it would deliver price stability.
The decision exposed divisions within the central bank over whether interest rates should rise further to contain inflation.
Fed Governor Lisa Cook, whom President Donald Trump is targeting for removal from the central bank, dissented in favour of a quarter-percentage-point rate increase.
It was her first dissent on a monetary policy decision.
Cleveland Fed President Beth Hammack, another consistently hawkish policymaker, also voted for a rate hike.
Furthermore, a section of Fed officials remain concerned that demand supported by AI investment and resilient consumer spending is adding to price pressures.
“The forces keeping the Federal Reserve hawkish haven’t faded. Diesel and gasoline prices remain elevated, AI-driven inflation isn’t easing, and the labor market remains resilient,” said Michael Pearce, chief US economist at Oxford Economics.
The decision, however, had been widely anticipated after senior Fed officials indicated there was little urgency to raise rates again following the quarter-percentage-point increase approved last month.
Since then, inflation data have come in stronger than expected, reinforcing concerns about the persistence of price pressures.
Financial markets reacted modestly to the announcement. US stocks pared some gains following the decision but finished higher on the day, while longer-dated US Treasury yields extended their rise.
Short-term interest-rate futures edged higher as traders slightly reduced their expectations for further Fed tightening.
Markets continued to price in additional rate increases over the coming months, although with less conviction after Warsh’s press conference.
Pricing indicated an approximately 80% probability of a rate hike at the Fed’s December 8-9 meeting, with another increase considered likely by March.
Inflation remains around one percentage point above the central bank’s 2% target and has made little progress towards that goal in recent months.
Energy costs remain a particular concern. Elevated diesel prices affect shipping, agriculture, and other industries, potentially increasing costs across supply chains and complicating the Fed’s efforts to bring inflation under control.
The Fed’s struggles in containing the inflation have also resulted in a section of its policymakers worrying that businesses and households are becoming accustomed to faster price increases and could adjust their pricing and spending decisions accordingly, making inflation more difficult to contain.
Both inflation and the cost of living have become the key talking points ahead of the November 3 US midterm elections, which will determine whether Trump-led Republicans retain their control of both chambers of Congress or Democrats gain greater oversight powers.
Trump has repeatedly criticised the central bank for not delivering deeper interest rate cuts.
Following September’s rate increase, he described Warsh’s policymaking colleagues as “hostile” and “partisan.”
Dismissing Trump’s concerns, Warsh said politics played no role in the Fed’s decision to keep rates unchanged.
